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Working Papers

The REIT Vehicle: Its Value Today and in the Future

Working paper #309
Joseph Gyourko and Todd Sinai

• The REIT shield against the corporate income tax is worth about 4% of total industry market capitalization.
• Added capital raising costs associated with being a REIT reduce the net benefit of the REIT structure to as low as 2% of market capitalization.
• The benefits of the REIT structure are higher for low payout ratio firms. For firms with 60% payout ratios the REIT structure is worth up to 8% of equity market capitalization.
• Even for rapidly growing firms with large capital needs, it is highly unlikely that an alternative to the REIT format will prove financially superior.
• The REIT vehicle can be made more valuable by increasing the share of tax exempt and tax deferred investment. These investors do not find a high dividend flow burdensome for tax reasons. Increasing the share of tax exempt or deferred investment to 40%, the fraction existing in the broader equity market will more than double the value of the REIT format.

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